Gauging the new Fed chair

Tuesday

Oct 15, 2013 at 12:01 AMOct 15, 2013 at 3:50 PM

Economist Janet Yellen is poised to succeed Ben Bernanke as chair of the U.S. Federal Reserve when his term expires Jan. 31. If the Senate confirms her nomination, as expected, she will become the first woman to run the planet’s largest national economy.

This 67-year-old academic worked her way up at the Fed. She has served as a supportive No. 2 to Bernanke since 2010. The new job would be a huge step up in influence from her current title of vice chair.

If she is confirmed, bankers and traders will hang on her every word, as they have on Bernanke’s and previous Fed chiefs. Other central banks will look to Yellen for direction. Her ascension will mean that women — Yellen, German Chancellor Angela Merkel and International Monetary Fund boss Christine Lagarde — hold three of the global economy’s most critical posts. That’s quite a milestone.

Yellen has the background and experience to be a very effective Fed chair. The challenge she faces will demand a very effective Fed chair.

Bernanke has been pouring on monetary stimulus for years. He has expanded the Fed’s balance sheet from $859 billion in mid-2007 to $3.7 trillion. His successor will be left to deal with the consequences.

During her tenure at the Fed, Yellen has played Bernanke’s game. She was a strong advocate of the central bank’s aggressive intervention during the financial crisis of 2007-09. The Fed did what was required to rescue a banking system in danger of collapse. But we’ve been skeptical about what the Fed has done since the economy stabilized — continuing to pour on stimulus, to less and less effect. The Fed should have backed off its unprecedented quantitative easing program long ago. Yet Yellen still favors the $85 billion a month bond-buying binge known as QE3, which continues today.

As of Jan. 31, Yellen will own it. All those securities the Fed has picked up in a bid to keep interest rates low and boost economic activity will have to be sold off eventually. Never before has the Fed had to manage such a massive effort, so there is no road map for Yellen to follow.

Similarly, the Fed’s easy money policy of near-zero interest rates can’t go on forever. Someday, Yellen will have to “take away the punchbowl” (that’s Fed-speak for tightening the money supply). Otherwise, inflation will erode the dollar’s value and asset bubbles will form that can do terrible damage when they pop: Witness the recent real-estate bust. Yellen has consistently predicted that despite all the Fed stimulus, inflation wouldn’t break out. She has been right — so far, anyway. Inflation could come on fast.

Many commentators have tried to peg Yellen: She’s a Democrat. She’s a Keynesian. She’s a Bernanke acolyte. She cares more about reducing unemployment than fighting inflation. She may be too soft to crack down on inflation before it gets going.

Let’s wait and see. Often the circumstances make the chairman. Everyone can speculate based on her history, but no one really knows how a Chairwoman Yellen will play whatever hand the economy deals her.

Bernanke and Yellen recognize that uncertainty hurts the economy. In a speech earlier this year, Yellen spoke approvingly of the “revolution” in communication at the Fed’s policymaking open-market committee. “The revolution in the FOMC’s communication, however, isn’t about technology or speed,” she said. “It’s a revolution in our understanding of how communication can influence the effectiveness of monetary policy.” Tell us more. We will be listening.